Share of manufacturing in India’s total employment: No mean performance

Available jobs data show only a modest increase in the share of manufacturing in India’s total employment in the last 50 years. In this post, Bishwanath Goldar highlights that the outsourcing of services used by manufacturing has grown speedily over time, due to the splintering of services from manufacturing. If this is accounted for, the performance of manufacturing in job creation is not as dismal as indicated by the data.

Many scholars and commentators have expressed disappointment that the share of manufacturing in India’s total employment has remained almost stagnant, according to the available employment data, and employment growth performance not been as good as in East Asian countries. Such dissatisfaction has also been expressed about the manufacturing share in gross domestic product (GDP) not showing an upward trend despite important product market reforms such as trade liberalisation and abolition of industrial licensing.

Recent work shows that if we compute the constant-price gross value added (GVA) of different sectors of the Indian economy for various years since 2003-04 by using the ‘double deflation method’¹, the share in manufacturing in aggregate GVA has not been stagnant but increased significantly over time (Goldar 2024, Goldar and Das 2024). The application of the double deflation procedure for national accounts is highly desirable, and many countries, including several advanced economies and some emerging market economies (Brazil, Mexico, and South Korea), apply the double deflation method for national accounts. If India had used the double deflation methods from the 2004-05 series and continued in the 2011-12 series, then the share of manufacturing in aggregate real GVA at 2004-05 prices would have doubled from 16% in 2003-04 to 32% in 2018-19.

Trends in manufacturing employment share

Let us take a closer look at the share of manufacturing in employment. According to recent estimates by Dev (2024), the manufacturing share in employment increased from 8.9% in 1972-73 to 12.8% in 2011-12, a four percentage points increase in about 40 years. These estimates are based on the ‘Employment-Unemployment Survey’ (EUS) of the National Sample Survey Organisation (NSSO). There are difficulties in tracing the manufacturing share in employment for years beyond 2011-12 because of incomparability between employment data of the ‘Periodic Labour Force Survey’ (PLFS) of the NSSO and that of the EUS. Estimates of manufacturing employment for 2011-12 based on EUS and those for 2018-19 based on PLFS are about 60 million. It is not easy to believe that India’s manufacturing sector did not create more jobs in seven years when industrial output grew significantly.

Other available data indicate an increase in manufacturing employment between 2011-12 and 2018-19. Employment in organised manufacturing, as per the ‘Annual Survey of Industries’ (ASI), increased by about 2.7 million between these two years, and employment in enterprises of the Khadi and Village Industries Commission (KVIC), which is a part of unorganised manufacturing employment, increased by 2.8 million. Therefore, the estimate of manufacturing employment for 2018-19 obtained from PLFS data needs to be raised by at least 6 million to make it comparable to the estimate for 2011-12 based on EUS data. With these adjustments done, the share of manufacturing in employment was about 13.8% in 2018-19, about five percentage points higher than in 1972-73 (see Figure 1). This trend cannot be called flat.

Figure 1. Manufacturing share in employment

Source: The figures for 1972-73 to 2011-12 are from Dev (2024). The estimate for 2018-19 is obtained as explained in the text.

The splintering of services from manufacturing

The process leading to the splintering of services from manufacturing is well-recognised. One of the oldest studies on this aspect was by Bhagwati (1984). In Goldar and Banga (2007), we have also studied the role of services input in Indian manufacturing. This phenomenon lies at the root of the observed sluggish increase in manufacturing share in employment in the country, based on available employment data. Consider a manufacturing factory in India in 1973. The factory required many services to support manufacturing activity, most of which were provided by its staff, who were therefore counted as manufacturing sector workers. Over time, the factory found it more profitable to outsource these services, and the workers providing those services began to be counted in the services sector rather than the manufacturing sector. These jobs were an organic part of the manufacturing activity but got splintered from manufacturing with the advance of technology and the development of capable services-providing firms.

It is hard to estimate the extent to which the splintering of services from manufacturing has taken place in India. However, a crude estimate can be made by considering the services purchased by manufacturing factories vis-à-vis the payments made to their employees. The Reports of ASI do not contain data on services purchased by factories, but a rough approximation can be made by taking the value of total (intermediate) input and subtracting the value of materials, fuel, and power consumed. When this figure on services purchased (which includes other miscellaneous costs such as rent paid for building, plant, and machinery, and cost of repair and maintenance) is divided by the emoluments paid to employees, the ratio is found to be 0.4 for 1973-74, 0.8 for 1974-95 and 0.9 for 1975-76 (an average of 0.7), and 2.4 for 2017-28, 2.5 for 2018-19 and 2.4 for 2019-20 (an average of 2.4). The implication is that once the service jobs splintered from manufacturing are added back to the number of workers in organised manufacturing, the total number of such jobs could be double of what is reported in ASI or even more. Since organised manufacturing accounts for about one-fourth of the total employment in manufacturing, the estimated share of manufacturing of 13.8% mentioned above would need to be raised by four percentage points or more to make the proportion comparable to the figure for 1972-73. Hence, the rise in manufacturing employment share in India has been significant, not paltry.

Cross-country comparison

According to United Nations data, the share of manufacturing in total employment (conforming to ICLS-19 – the standards adopted at the 19^th International Conference of Labour Statisticians in 2013) – was 10.9% in India in 2020. The corresponding figure for Cambodia is 15.1% (2019), China is 28.7% (2020), Indonesia is 14.0% (2022), Malaysia is 16.7% (2022), the Philippines is 7.9% (2021), South Korea is 16% (2022), Thailand is 15.7% (2021), and Vietnam is 21.0% (2021) (Our World In Data, 2022). These data show that India’s manufacturing employment share is lower than most East Asian countries.

It has been argued above that the estimated share of manufacturing in India needs to be adjusted upward by about four percentage points or more to account for the splintering of services from manufacturing. This adjustment would not bring the manufacturing employment share in India to the levels in East Asian countries because the splintering effect must have also been there in these countries. Two arguments may be put forward in this regard. First, given India’s vastly developed services sector, the extent of splintering might have been relatively greater. Second, the use of foreign services in manufacturing is lower in India than in most East Asian countries. As per the 2023 edition of the Trade in Value Added (TiVA) database, in 2018, the value-added component of foreign services in the country’s gross exports of manufactured products was about 9% in India, as compared to 18% in Cambodia, 7% in China, 7% in Indonesia, 18% in Malaysia, 13% in the Philippines, 13% in South Korea, 17% in Thailand, and 20% in Vietnam. The implication is that while the splintering of services from manufacturing led to job creation in services predominantly on Indian soil in the case of India, it led to significant amounts of job creation on foreign soil in the cases of several East Asian countries. Once these two factors are taken into account, the job creation performance of Indian manufacturing does not appear to fall much short of that of East Asian countries.

The views expressed in this post are solely those of the author, and do not necessarily reflect those of the I4I Editorial Board.

Note:

In the double deflation method, the value of output is deflated by an output deflator, while raw materials are deflated by a raw material deflator. Then the two real numbers are subtracted, to obtain real GVA estimates.